Is Your Hospital Bond Disclosure Up To Snuff?

A new report released by DPC Data yesterday shows a large percentage of hospitals and other tax-exempt borrowers are not filing timely market disclosure data as required by bond documents. Given how skimpy the typical continuing disclosure agreement can be, failure to provide that information on a timely basis can have more severe, long-term consequences than most hospitals realize.

A new report released by DPC Data yesterday shows a large percentage of hospitals and other tax-exempt borrowers are not filing timely market disclosure data as required by bond documents. Given how skimpy the typical continuing disclosure agreement can be, failure to provide that information on a timely basis can have more severe, long-term consequences than most hospitals realize.

The DPC report notes that from 2005 through 2009, one out of five general acute care hospitals failed to meet their disclosure requirements in three or more years. About half failed in at least one year. The record is similar for children's hospitals.

Some hospitals do not take disclosure very seriously because according to most continuing disclosure agreements in bond documents, failure to disclose does not create an event of default: the typical remedy is "specific performance", i.e. disclosing the information takes care of the problem. We think that approach can be a big mistake.

First, SEC Rule 15c2-12 requires that borrowers who fail to disclose must file a Material Event notice with EMMA. This scarlet letter is permanently on file even after the deficiency is remedied. Second, and even more critical, bondholders and rating agencies will take notice. In many cases, bondholders have limited information to base their multi-million dollar purchases on: annual audited financial statements with a summary of volume/utilization statistics and sometimes, but not always, quarterly statements. If this sliver of data is not provided on a timely basis, bondholders will question how good of a handle management has on their business, and will handicap the next bond issue with a higher coupon and/or more stringent terms. Rating agencies are increasingly more focused on timely disclosure, and will note a borrower's quality and track record of disclosure in their rating reports, also permanent. The net impact of failure to disclose is more risk that the borrower will be unable to access the debt markets on acceptable terms.

Transparency in the bond markets has been an issue for years, and regulatory efforts have been underway for some time to step up the requirements and penalties for failing to disclose. For hospitals who seek to maintain or improve access to funding, disclosure needs to be taken seriously.